Saturday, October 11, 2008

Doug Noland of Prudent Bear, author of the long-running Credit Bubble Bulletin weekly commentary that has foretold of the events now unfolding for many years, reflects on the future of the world and his four-month old child while Hoping There's Hope.

This is the first all-encompassing global dislocation of contemporary finance, impacting virtually all economies, markets and asset classes. The media is now all over the “Wall Street” and “banking” crisis. I am of the view, however, that the collapse of the hedge fund industry has moved to the forefront – that it is now at the epicenter of global market upheaval. To watch silver lose more than 20% of its value today in intraday trading; to see the collapse in energy prices; to see the entire commodities complex absolutely routed; to view global currency markets in complete disarray, with double-digit intraday drops in the Brazilian real and Mexican peso; to witness major currencies such as the Australian and Canadian dollars suffer precipitous declines; for benchmark Fannie Mae MBS yields to surge 62 bps in three days; to see Brazilian dollar bond yields jump almost 200 bps in four sessions; for global equities indices to suffer rapid double-digit drops throughout both the developed and “emerging” markets; to witness a 1,000 point intraday swing in the DJIA. All the favorite trades are blowing up, and the leveraged speculating community is in a panic de-leveraging.

There is no doubt that markets are in the midst of an unprecedented liquidation of positions across virtually all asset classes and a vicious unwind of a multitude of investment and trading strategies. The Massive Pool of Global Speculative Finance is being drained. Investors and speculators alike are desperate to flee risk. Having watched the ballooning of the hedge fund industry over the past few years in absolute awe, I can say today that an industry collapse would entail the sale (voluntary and forced by the margin clerk) and unwind of literally Trillions of positions. It has been history’s most spectacular speculative Bubble and, especially over the past few years, it became very much global in nature and infiltrated virtually all asset classes. This Bubble is in a full-fledged collapse – entailing unprecedented liquidations - and it’s taking global markets down with it.

The situation is dire, as is now commonly recognized. The media is in a tizzy, and Wall Street makes for an easy and generally deserving villain. I fear the rapidly mounting anger. But I guess for this evening there is something about coming home after a distressing week and spending time with my little four month old baby. My wife and I gave our smiling and laughing little guy a bath and I just kissed them goodnight. I just don’t have it in me right now to analyze and to write gloom. I’d rather Hope there is Hope.

Perhaps things will stabilize once the hedge fund liquidations run their course. Treasury (TARP) purchases will commence soon. Fannie and Freddie will be aggressively expanding their market purchases. The Fed is now buying commercial paper, and the Fed and Treasury are working to resolve the dislocation in the “repo” market. Across the globe, governments are in full crisis management mode. There appears universal resolve to bolster financial sectors and stem the collapse. And there were actually some positive indications of stabilization in our Credit system late in the week.

I also hold out Hope that the Trillions of reserves held by global central bankers will provide some buffer to stem financial system collapse. In particular, I am Hoping that China, India, Russia, Brazil and the Middle East have today sufficient reserves to somehow avoid a ‘90s style financial and economic meltdown. I am Hoping that demand from China, India, Asia and Latin America will help offset inevitable economic downturns in the U.S. and Britain and, hopefully to a lesser extent, Europe. I am hoping that the collapse in energy and commodities prices is more a reflection of acute financial market dislocation rather than a harbinger of synchronized global economic upheaval. I am hoping there is more substance to the dollar’s rally than simply an unwind of bearish dollar bets. And I am hoping that with large capital infusions our deeply impaired banking system will retain the capacity to finance a much less robust but at least functioning U.S. economy. I really Hope everything is not as dire as it appears.

6
comments:

Pleasant thoughts for the weekend... Over the weekend we have been chatting on myinvestorsplace.com ...and it seems the only area that has been positive...( and depending on the manager himself) was managed futures and CTAs... CTAs can trade in either direction ..as long as there is a direction... and many have made money... the scary issue however is the broker in which the trades are being placed... eventhough there are segrated accounts... all the members ...dont trust any one or any bank at this point... great post... thanks... Do you know of any ideas that you can share with us as far as protecting capital....and possibly even making money????... thanks ..

Not to sound overly pessimistic... another 2 banks failed this week...I believe the total is 15 with another 117 on watch ...with that said...almost 20% of the 53 billion the FDIC started with this year is gone... that does not leave me to comfortable.. but I assume they can always print more money...thanks..

Regarding the TARP, what if they restructured some mortgages to 40-year amortization?

Critically, before the market debacle that started last year, pension funds were struggling to find fixed income assets with sufficient duration. At the same time, many borrowers who are unable to sustain current mortgage payments and interest terms, may very well be able to cover payments if the amortization schedule of their mortgages was extended to 40 years.

Now, 40 years sounds "scary", but why? The reason is that we have 30 years stuck in our minds as "normal". However, that normal came from traditions that are over 50 years old, in a time when life expectancy was much less and there was normally 1 income per family. Many died or retired with balances still on their mortgage. So, given extended life expectancy, 40 years is manageable and reasonable for troubled borrowers also.